Decision on Limitation Made on Demurrer Not Final; Party Autonomy in Arbitration Cannot Override Statute

Introduction

In a recent judgment, the Supreme Court of India reaffirmed the limits of party autonomy in arbitration, holding that a decision on limitation made “on demurrer” without taking evidence cannot be treated as final. The Court clarified that while arbitration is built on the principle of party autonomy, it cannot override statutory mandates such as those under the Limitation Act, 1963.

The ruling came in Urban Infrastructure Real Estate Fund v. Neelkanth Realty Pvt. Ltd. & Ors.

Background

The case arose from a ₹25 crore investment by Urban Infrastructure Real Estate Fund (UIREF), a Mauritius-based private equity fund, in Neelkanth Realty for a township project in Pune under agreements signed in 2008. Disputes led to arbitration in 2017.

At the respondents’ request, the arbitral tribunal first decided whether the claims were time-barred. Proceeding “on demurrer” that is, assuming all facts pleaded by UIREF were true and without recording evidence the tribunal held that the claims were within limitation.

The Bombay High Court later ruled that limitation being a mixed question of law and fact cannot be conclusively determined without evidence, and allowed the tribunal to revisit the issue. Challenging this, UIREF approached the Supreme Court, arguing that the parties had agreed to a final determination on demurrer, invoking the doctrine of party autonomy under Section 19 of the Arbitration and Conciliation Act, 1996.

Supreme Court’s Observations

The Court explained the concept of demurrer as a procedural device allowing a party to test the legal sufficiency of a claim while assuming all facts are true. However, it clarified that such a device is confined to pure questions of law and cannot extend to issues involving factual examination.

The Bench held that limitation often depends on factual aspects such as acknowledgements or continuing breaches and is therefore rarely a pure question of law. Hence, a decision made on demurrer cannot foreclose later factual inquiry.

Importantly, the Court emphasised that party autonomy cannot override statutory obligations. Section 3 of the Limitation Act imposes a positive duty on all adjudicating authorities, including arbitral tribunals, to reject time-barred claims irrespective of the parties’ consent. Therefore, any agreement attempting to curtail or bypass this obligation is legally impermissible.

Conclusion

Achieving equilibrium on the spectrum of flexibility and enforcement within arbitration unveils the Court’s decisions. Where an arbitral tribunal is reluctant to treat preliminary findings as final findings and untested facts are still present, the Court reinforces the arbitral tribunal’s adherence to the Limitation Act.

It is relentless and, if need be, overprotective to tighten the reigns on the flexibility of arbitration. It thinks that efficiency and flexibility in arbitration is an aberration to the exhaustion of the law. This arming of law alongside contract is bound to remind practitioners of the tension that will forever exist between law and autonomy.